Global Structural Reform:
A new-era response to business restructuring

Introduction

The financial crisis has resulted in widespread bank restructuring driven by
cost reduction, business optimization, competition and regulation. Initially,
investment banks focused on immediate cost reduction and simplification
programs; however, subsequent macroeconomic developments, coupled
with the ensuing market and regulatory pressures, have triggered the need
for structural change in business and operating models.

Rule-makers have been prolific in recent years, with individual jurisdictions
seeking to reshape financial institutions and enhance their operational
resilience. Since this persistent wave of regulation shows no signs of
abating, banks can no longer rely on traditional ways of working and are
being forced to make hard choices about their post-crisis business models.

Recent events revealed numerous weaknesses in global regulatory
frameworks and banks’ risk management practices. Regulatory authorities
are now considering new measures to increase financial market stability,
including requiring each bank to provide a consolidated view across all
businesses and types of risk (e.g., market, credit and liquidity risk).
For example, the fundamental review of the trading book (FRTB) restricts
banks’ capital, limits positions and curtails principal trading. As such, banks
are faced with a new approach to market risk management.

Stricter stress testing:

Capital and liquidity adequacy:

Local and global regulations are forcing institutions to operate in a more capital-restrained environment.

Recovery and resolution planning:

Regulators are taking steps to ensure the stability of banking operations, including establishing provisions for state takeover in the event an institution becomes insolvent.

Separation or cessation of activities:

These rules help prevent the failure of one legal entity or business line from causing systemic failure across the enterprise.

Geography-focused finance:

Institutions need to consider reorienting their financial ledgers, performance management and reporting to support financial operations at the jurisdictional level.

Global Structural Reform

Investment banks are now prepared to face the reality of this task—whether
they have had time to digest their position or are playing catch-up with
competitors.

Banks must synchronize their regulatory and strategic business planning and make restructuring in response to regulation part of their business strategy toolkit. Looking at the regulatory landscape holistically can help banks identify inter-regional synergies to leverage.

Inter-regional synergies across the regulatory landscape

Regulations

Synergy Pillars

Areas of Synergy

Capital adequacy

Clearing

Liquidity standards

Ring-fencing

Pre- and post-trade transparency

Record keeping

Reporting

Best execution

Market electronification

Timely post-trading process

Control enhancement

Market abuse and manipulation prevention

Adverse trading and insider information

Investor protection

Regulations

Synergy Pillars

Areas of Synergy

Capital adequacy

Clearing

Liquidity standards

Ring-fencing

Pre- and post-trade transparency

Record keeping

Reporting

Best execution

Regulations

Synergy Pillars

Areas of Synergy

Market electronification

Timely post-trading process

Control enhancement

Market abuse and manipulation prevention

Adverse trading and insider information

Investor protection

Source: Accenture Research

Evaluating the business mix

As investment banks look to tackle the restructuring challenge, five core considerations must be reviewed against business priorities. These considerations can help banks optimize capital and satisfy the bottom line, while adhering to regulations.

Business activities:

Shifting and streamlining core investment banking activities can help banks align specific activities with specific regions for business benefit. For example, concentrating broker-dealer licenses in a single jurisdiction may be cheaper than having licenses in multiple jurisdictions, particularly in low-volume situations. Activities such as securities trading, securities financing, securities warehousing, derivatives management, cash management and clearing can be analyzed for streamlining opportunities. Further examples include shifting from principal to agency business models, or leveraging the opportunities provided by trading venue development (i.e., systematic internalizer).

Geography:

Tailoring propositions to geographic markets can help banks use scarce capital more efficiently.

Product mix:

Developing a targeted set of offerings can help banks allocate capital to business lines that generate appropriate returns on equity and potentially discontinue other products.

Client mix:

Targeting profitable client segments and exiting relationships that have a high cost of service can help banks improve their client mix.

Financial optimization:

Focusing on a combination of the factors listed above with a clear goal of optimizing capital, liquidity, funding or taxation can help banks reduce costs and increase net capital or revenue gains.

New business and operating model

Against this backdrop, a “consolidation” operating model is starting to emerge. Investment banks are looking for ways to simplify their structures by streamlining their business activities and ultimately “thinning out” their legal entity structures to support consolidation and net capital benefits.

Regardless of what shape the business restructuring takes—for example, disposals or exits, acquisitions, transfers to improve capital and funding positions, transfers to improve resolvability or wind-downs—there is no
single solution for responding to this challenge. Each institution’s response should reflect its strengths, weaknesses and future expectations. Banks can begin by taking the following steps:

Organize a long-term response.

Institutions need to think end-to-end across regulations and geographies, and holistically assess and communicate impacts across their business and operating models—to streamline the change response and identify smart investments.

Focus on compliance and efficiency.

Reputation may be a competitive advantage in the future, with clients and customers drawn to firms with strong ethical reputations that are capable of meeting their needs efficiently.

Aim for market-driven specialization.

Institutions can address competitive challenges by focusing resources and attention on certain customer, product or geographic market segments. They need to consider the type of business they want to conduct in each location and the practical operations required to sustain those businesses.

Demonstrate value to stakeholders.

Value can only be realized if planning is adopted effectively throughout the business. Further tuning of the new operating model will be required to help retain engagement and support from internal and external stakeholders.

WHAT’S THE CATCH?

Core components of investment banking restructuring

Transfer Mechanics

Includes the design and execution of legal mechanisms to effect the transfer, and associated client/market communication, rebooking, hedging and funding activities in the sending and receiving entities.

Capital, Liquidity and Funding

Involves managing the transfer within the constraints imposed by the balance sheet and capital position of sending and receiving entities.

Clients, Products and Business Model

Includes managing the transfer of “live” revenue strategies, critical client relationships and trades. Corporate structure and assets may need adjusting to maintain the viability of the transferring business.

Operational Data and Configuration

Includes managing the definition, remediation and setup of client, instrument, price, hierarchy and calendar data in the receiving entity, and making any adjustments within the sending entity.

Processes, Systems and Infrastructure

Involves the extension of receiving execution and control infrastructure by enhancing existing or integrating transferring capability. Will address business process and information, application functionality and technical services.

Organization, People and Property

Involves consulting with staff bodies and organizational restructuring. Also involves the provision of premises and third-party services and associated contract novation.

Source: Accenture Research

A FRAMEWORK TO DEAL WITH RESTRUCTURING

Restructuring exercises require banks to consider a number of factors—a potentially cumbersome process if the bank has a particularly complex organizational structure. Without a logical framework, it can be challenging to determine the robustness and completeness of a restructuring plan. Typically, investment banks will need to consider six core components (see table above).

These components should be considered at each stage of the restructure, from due diligence to legal close, and accompanied by stringent regulatory and program management.

A structured framework is not a one-size-fits-all solution. Rather, such frameworks can help banks increase certainty and speed when conducting certain initiatives. In addition, calibration of local and global regulations can help frame implementation programs.

CONTACTS

DIANE NOLAN

Brussels

OLUCHI IKECHI

London

JULIEN MARZYS

Brussels

ANTONELLA AURELI

Milan

PAOLO BROGNARA

Milan

This content has been prepared by Accenture and is for information purposes. No part of this content may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.

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